The historical basis for almost all rate challenges before the Board is the “stand-
alone cost test” (SAC). Under this test, a shipper or group of shippers builds a model of
an efficient hypothetical “stand-alone” railroad, serving that shipper but assumed to carry
and benefit from additional traffic from other existing shippers, and calculates the rates
that would be charged to meet just the cost of constructing and operating that railroad,
including a return on capital.”° If the existing rates exceed that level, they may be judged
by the Board to be unreasonably high, and the Board may both impose a fine and order a
rate reduction.2’ As the record in this proceeding and elsewhere clearly shows, the SAC
test is considered by most shippers to be too expensive and complex to serve as a useful
check on the railroads.”* Efforts by both Congress and the Board to create simplified
versions of the SAC test for small- and medium-sized disputes have not proved
successful.

A potential policy avenue for providing more effective protection to captive

shippers is the adoption of an alternative to the SAC test? One option is to set a ceiling

6 BNSF Railway v. STB, U.S.C.A. (D.C. Circuit) No. 06-1372, May 20, 2008.

27 See, e.g., Western Fuels Association and Basin Electric Power Cooperative v. BNSF Railway, Decision,
STB Docket No. 42088, February 17, 2009.

8 See, e.g., Russell Pittman, Against the Stand-Alone-Cost Test in U.S. Freight Rail Regulation, 38 J. REG.
ECON. 313 (2010).

29 From an economic standpoint, there are serious questions about whether the use of the SAC test is even
appropriate in the context of 21st century U.S. railroads. In particular, it is clear from both the original
scholarly sources and subsequent discussions in the literature that the primary rationale for the test — that if
one group of customers pays more than SAC for their service, it necessarily follows that this allows other
customers to pay less than the incremental cost for their service, and hence there is direct evidence of cross
subsidies from the former customers to the latter — applies only in the context of a rate-of-return
constrained public utility, a setting that clearly does not characterize the U.S. freight railroads.

See, e.g., Gerald Faulhaber, Cross-Subsidization: Pricing in Public Enterprises, 65 AMER. ECON.R. 966
(1975); William Baumol, John Panzar, and Robert Willig, Contestable Markets and the Theory of Industry
Structure (1982); Mark Meitzen and Alexander Larson, The uses and abuses of stand-alone costs, 2
UTILITIES POL. 135, 143 (1992) (“Only when economic profits are constrained to zero ... does the
duality between stand-alone and incremental costs hold.”); Leigh Hancher and Jose-Luis Buendia Sierra,

14


Figure 1: Class I Railroad Cost of Capital and
Return on Net Investment, 1997--2009

12 +

Percent

SNRABDS

1997
1998
1999
2000
2002
2003
2004
2005
2006
2007
2008
2009

2001

Discounted Cash Flow
—a-Capital Asset Pricing Model (CAPM)
—t—Return On Investment

-e—CAPM + Multiple Stage Discounted Cash Flow
Sources: AAR, Railroad Facts; Surface Transportation Board

Since 2004, Class I railroad industry profitability has increased rapidly, peaking
during 2008 (Figure 2). Although Class I railroad total operating revenue in 2009 was
more than $4.3 billion less than during 2006, the level of net income decreased only
$0.059 billion from 2006 levels. This reflects the ability of railroads to exercise market

power, even during the recession, by raising rail rates.

0 Figure 2: Class I Railroad Profitability

Billion $
S

wa

——

0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
—Net income

Earnings Before Interest and Taxes

~—*~—Earnings Before Interest, Taxes, Depreciation, and Amortization

Source: AAR, Analysis of Class | Railroads



trackage rights — especially the additional administrative, scheduling, and monitoring

costs of hosting another company’s trains on the track — would be incurred.

Bottleneck Pricing

»I3 ond

A third option would be for the Board to revise its “bottleneck decisions,
thus to force railroads to “untie” or “decouple” their services by quoting separate rates for
each component of a freight movement, with the individual rate charged for a segment
for which the railroad faces no competition to be regulated. Some would even place the
burden of proof on the railroads to show the reasonableness of such “bottleneck” rates
when challenged."

A complete reversal in the Board’s bottleneck policies could have a potentially
large effect on railroad profitability and ability to invest. Additionally, it could increase
costs and sacrifice operational and cost efficiencies, which could offset the effects of
increased competition depending on how movements are segmented.'*

Thus, should the Board decide to revise its bottleneck policies, the ability of
shippers to request bottleneck rates should be limited to a fixed regulatory distance,

which could increase incrementally over time to a distance of up to 150 miles. Increasing

the regulatory distance over time offers the advantage of allowing the railroad industry to

Central Power & Light Co. v. Southern Pacific Transportation Co., et al., | STB 1059 (1996)
(“Bottleneck I”), modified in part, 2 STB 235 (1997) (“Bottleneck II”), aff'd sub nom. MidAmerican
Energy Co. v. STB, 169 F.3d 1099 (8" Cir. 1999), cert. denied, 528 U.S. 950.

"4 See, e.g,, Michael Nelson, Review and Analysis of Public Interest Considerations Associated with Rail
“Bottleneck” Issues, Prepared for Consumers United for Rail Equity (CURE), March 12, 2008.

5 Christensen Report at ES-39. (“length-of-haul economies are diminished as interchange between two
railroads . . . occurs further from an endpoint of a movement”).

10


Parties have proposed three different regulatory mechanisms for competitive
access — mandatory reciprocal switching, mandatory terminal trackage rights, and a
requirement that railroads quote separate rates for “bottleneck” segments.’ USDA
submits that mandatory reciprocal switching, which we proposed in our initial comments,
and mandatory terminal trackage rights offer some potential to provide real competitive
alternatives to captive shippers without unduly burdening the railroads. Changes to
bottleneck policies, however, could have a larger effect upon the rail industry. Thus,

changes to bottleneck policies may best be done incrementally.

Reciprocal Switching

Through the mandatory reciprocal switching proposal, a shipper captive to one
railroad (A) but within a certain short distance of a competing railroad (B) would be able
to ship its cargo for the long haul on railroad B and then require A to switch the cargo to
A’s own trains at the point of the AB intersection and deliver the cargo to the captive
shipper itself, subject to a regulatory rate ceiling. As we pointed out in our initial
comments, Canada uses this type of system to protect its captive shippers, requiring
reciprocal switching when the connection to railroad B is within 30 km (about 18 miles)
from the captive shipper. A number of shippers with facilities in Canada report using this

mechanism to obtain competitive rates.

7 To the extent that carriers decline to compete for traffic made available through the competitive access
rules, the benefits of such reforms will not be realized.

5 See, e.g., Comments of the National Industrial Transportation League at 12 (“League members with
facilities in Canada have benefited from that country’s inter-switching provisions and found the Canadian
tules to offer a simpler and more cost-effective approach to establishing switching arrangements.”);
Comments of The Fertilizer Institute at 11 (stating that several members “unequivocally report positive
experiences in Canada where they believe inter-switching has made their Canadian facilities more
competitive than their captive U.S. facilities” and that Canadian railroads “have thrived in that environment

7


As a result of decades of efficiency improvements and recent but consistent rate
increases, the railroads are now earning approximately their cost of capital and maybe
more. There can be no doubt that the rail industry is in far better financial health today
than it was in the immediate post-deregulation period. For example, in the first quarter of
2011, the Class I railroads announced record earnings, despite rising fuel prices, service

disruptions caused by severe winter weather, and a still sluggish economy.°

USDA RECOMMENDATIONS

USDA asserts that there is ample legal and factual basis for the Board to explore
changes in regulatory policy. We urge the Board to consider first those options that hold
the greatest prospect for facilitating greater rail competition and protecting shippers from.
a lack of competition without jeopardizing the financial ability or incentive of the rail
industry to make appropriate capital investments. We outline these below. ®

One policy option would be to increase the rail competition enjoyed by captive
shippers through enhancing competitive access. Although some shippers have reported
that even access to a second railroad may not produce competitive results, actual
competition should result in rates that more accurately reflect the actual costs of service,

encourage better service quality, and give shippers a choice of carriers.

5 Union Pacific Reports Record First Quarter,

http://www.uprr.com/newsinfo/releases/financial/201 1/0420_igearnings.shtml; CSX Announces Record
First Quarter Results, http://investors.csx.com/phoenix.zhtml?c"92932&prirol-
newsArticle&ID=1552332&highlight=; Norfolk Southern Reports First Quarter 2011 Results,
http://www.nscorp.com/nscportal/nscorp/Media/News%20Releases/2011/1q_2011_results.html

© To the extent Class III railroads do not enjoy the financial health of the Class I railroads, the Board
should consider whether it is appropriate to pursue these options with the smaller carriers.


would carry the freight itself to the captive shipper, using trackage rights over the
infrastructure of railroad A between the AB intersection and the shipper’s location. In
some cases, the rates paid for trackage rights are negotiated voluntarily by the two
railroads; in others, the two railroads may provide each other with trackage rights over
different sections of infrastructure, and no money changes hands; in others, the Board
may set rates. A number of shippers support a mandatory trackage rights mechanism."

USDA believes that the Board should give further consideration to proposals for
mandatory terminal trackage rights. Mandatory terminal trackage rights, like mandatory
reciprocal switching, would be imposed over only limited distances, as disruptions for a
railroad to have the trains of another railroad running on its track likely increase more
than proportionately with distance.'? However, there is no reason to believe that the most
appropriate “regulation-triggering” distance would be the same for the reciprocal
switching and terminal trackage rights. In particular, the two would differ in the structure
of costs that they impose on the railways.

For reciprocal switching, there would be a significant fixed cost of changing
locomotives (including the possibility of the shipment waiting for the new locomotive to
arrive), followed by a variable cost likely not much different from the variable cost of
running any other train on that section of track. For terminal trackage rights, the cost of

physically switching the traffic would be eliminated, but both fixed and variable costs of

"' See, e.g., Comments of Concerned Captive Coal Shippers at 92; Comments of the National Industrial
Transportation League at 3. The Christensen Report also found that mandatory terminal agreements would,
like mandatory reciprocal switching, likely have a small effect on railroad investment incentives and
profitability. Christensen Report at 21-7-9, 22-13.

” Christensen Report, op. cit.; see also 49 U.S.C. § 11102(a).


Date: May 27, 2011

BEFORE THE

SURFACE TRANSPORTATION BOARD

STB EX PARTE NO. 705

COMPETITION IN THE RAILROAD INDUSTRY

REPLY COMMENTS OF THE

U.S. DEPARTMENT OF AGRICULTURE

Edward Avalos

Under Secretary

Marketing and Regulatory Programs
US. Department of Agriculture
Washington, D.C. 20250


large.'® However, the procedures revised in 1996 were rarely used by shippers, and the
efficacy of those adopted in 2007 has yet to be determined.

It is in everyone’s interest for the railroads to earn sufficient returns on their
investments to be able to maintain, improve, expand, and safely operate their extensive
and expensive infrastructure and rolling stock. While shippers have a short-run interest
in lower rates, they may accept higher rates, if those rates are invested in rail
infrastructure that ensures service over the long term, provides better quality service, or
enables lower pricing in the future.’

When the railroads were in poor financial health, it was arguably appropriate that
captive shippers seeking regulatory redress for high rates faced a heavy burden.
However, as a result of decades of efficiency improvements and recent but consistent rate
increases, the railroads are now earning approximately their cost of capital.” There can
be no doubt that the rail industry is in far better financial health today than it was in the
immediate post-deregulation period. For example, in the first quarter of 2011, the Class I
railroads announced record earnings, despite rising fuel prices, service disruptions caused

by severe winter weather, and a still sluggish economy.”!

'8 Rate Guidelines — Non-Coal Proceedings, | S.T.B. 1004 (1996) (Simplified Guidelines); Simplified
Standards for Rail Rate Cases, STB Ex parte No. 646 (Sub-No. 1), September 4, 2007.

'° Shippers have expressed concern that some of the revenues from higher rates have been used to
repurchase the railroads’ own stock rather than being used to improve railroad infrastructure.

Laurits R. Christensen Associates, Inc., A Study of Competition in the U.S. Freight Railroad Industry and
Analysis of Proposals that Might Enhance Competition, November 2008 (“Christensen Report”).

Zi Union Pacific Reports Record First Quarter,

http://www.uprr.com/newsinfo/releases/financial/2011/0420_ I qearnings.shtml; CSX Announces Record
First Quarter Results, http://investors.csx.com/phoenix.zhtml?c=92932&p=irol-
newsArticle&ID=1552332&highlight=; Norfolk Southern Reports First Quarter 2011 Results,
http://www.nscorp.com/nscportal/nscorp/Media/News%20Releases/2011/1q_2011_results.html

12


adjust to financial effects over time, and would also allow the Board to monitor those

effects.

Alternatives for Determining Rate Reasonableness

Rail deregulation, while ending rate regulation for most shippers, retained the
requirement that rates remaining within the Board’s jurisdiction be “reasonable,” and
preserved federal authority to prescribe rates for shippers that do not have “effective
competition.”!® Congress did not define what is “reasonable,” and left its interpretation
to the Board and its predecessor agency, the Interstate Commerce Commission. The
authority to prescribe rates for shippers that do not have access to “effective competition”
has been interpreted to limit the availability of relief from unreasonable rates to “captive
shippers,” i.e., shippers served by only one railroad and without practical options for
transportation by truck or barge.'”

Captive shippers have long expressed dissatisfaction with the protections offered
by existing Board procedures. Rate proceedings conducted under the “stand-alone cost”
standard described below are considered to be extremely costly and time consuming for
all parties involved. The Board has twice sought to address this issue by crafting less

complex procedures for use in rate cases where the volume of commerce in dispute is not

© 49 U.S.C. §§ 10701(d\1), 10707.

"” Market Dominance Determinations, 365 1.C.C. 118 (1981). Shippers with access to two railroads have
been treated as per se non-captive. A number of shippers have contended, however, that even those with
access to two railroads may lack effective competition because the railroads decline to compete for each
others’ traffic. See, e.g., Comments of Ameren Corporation at 4-5; Joint Initial Comments of Omaha
Public Power District, e¢ al. at 9-14; Initial Comments of Consumers United for Rail Equity at 14. Ifso,
such shippers may thus face unconstrained rail rates but lack any ability to seek relief at the Board. The
Board should consider whether it may be necessary to extend rate relief to shippers that can demonstrate
such a refusal to compete.

11


USDA urges the Board to adopt its proposal for mandatory reciprocal switching,
as this mechanism potentially could enhance railway competition without unduly
burdening the Board, shippers, and railroads and without imperiling the financial health
of the railroad industry. The Christensen Report concluded that this measure likely
would have a small effect on railroad investment incentives and profitability.’ It should
be relatively straightforward for the Board to impose a ceiling on railroad A regarding
both the fixed charge for switching and the variable cost for hauling over such a short
distance.'°

The most appropriate distance to be chosen for such a regulatory mechanism is
inherently a difficult decision. Because the costs for switching should not be significant
to the total cost of the movement, USDA believes the distance should not be greater than
about 30 miles. If substantially greater than 30 miles, the issue could become more of a
line haul situation and could have unintended consequences for railroad profitability and

investment incentives.

Terminal Trackage Rights
A somewhat similar mechanism would be mandatory terminal trackage rights.
This system would work in a way similar to mandatory reciprocal switching, except that

instead of switching the traffic to railroad A at the point of AB intersection, railroad B

and are just as financially healthy as the U.S. carriers, if not more so”);Submission of Written Testimony,
Total Petrochemicals USA, Inc. at 5; see also. USDA Comments at 6.

° Christensen Report at 22-13.
'° See, e.g., USDA Comments at 6 (recommending a fee of up to 180 percent of variable cost “because fees

in recent trackage rights cases have been set as low as 130 to 145 percent of variable costs”); see also 49
U.S.C. § 11102(c).


RAILROAD INDUSTRY IS FINANCIALLY STRONG

The four Class I railroads that dominate the railroad industry in the United States
are achieving returns on revenue and operating ratios that rank them among the most
profitable businesses in the country. Unlike other transportation modes, railroads have
been able to maintain high profit margins even during the economic downturn of 2008-
10. Although the railroad industry has been investing record amounts into much needed
capital projects, the Class J railroads have also doubled dividend payments to their
stockholders and spent billions more repurchasing their stock. These large expenditures
undermine the argument that railroads stili lack the income to invest in their long-term
capital needs.*

Figure 1 shows that the railroad industry earned its cost of capital under the
capital asset pricing model (CAPM) methodology during 2005 and 2006 and was very
close to earning its cost of capital from 2007 through 2009. In 2009, during the depths of
the recession, the railroad industry earned 7.96 percent on its net investment compared to

the 10.43 percent cost of capital as determined by the Board.

4 United States Senate, Committee on Commerce, Science, and Transportation, The Current Financial
State of the Class I Freight Rail Industry, September 15, 2010.

4


on the revenue-to-variable cost (R/VC) ratio that may be charged to any captive shipper.
Variable cost (VC) is measured using a standard (though admittedly imperfect)
methodology, the Uniform Rail Costing System (“URCS”), and the R/VC ratio already
provides both a minimum screen that must be met for captive shipper rate complaints to
be considered by the Board and a floor for orders of rate relief.” A corresponding R/VC
ratio adopted as a rate ceiling (or a rebuttable presumption of a maximum reasonable
rate) would seem to be just as straightforward to calculate and not require the devotion of
significant resources by all parties that has been characteristic of rate cases under the
SAC tests.

In this proceeding, a number of parties have urged the adoption of a ceiling on the
R/VC ratio as superior to the SAC test! Furthermore, the Board relies on R/VC
measures in its application of the Simplified Standards for Rail Rate Cases.” Finally, the
Board has already imposed R/VC ceilings as remedies in four previous rate cases: twice
34

at 180 percent, once at 229-267 percent,” and once, most recently, at 346-356

percent.°®

Cross-Subsidization and EC Law, 35 COMMON MARKET L.R. 901, 908 (1998) (“Critics of this
approach have pointed out that it is based on the assumption that the regulated firm in question makes no
long-term excess profits.”); Faulhaber, Cross-Subsidy Analysis with More than Two Services, | J. COMP.
L. & ECON. 441 (2005) (“The SAC tests are not helpful under conditions of positive economic profits”);
Pittman, Against the Stand-Alone-Cost Test (“If the lack of a zero-profit constraint on the firm breaks the
link between SAC and IC [incremental cost], then failure to satisfy SAC for one set of products does not
imply cross subsidization of a second set”).

°° Burlington N. R.R. v. STB, 114 F.3d 206, 210 (D.C. Cir. 1997); US Magnesium v. U.P.R.R., STB Docket
No. 42114, January 27, 2010.

3! See, e.g., Comments of Concerned Captive Coal Shippers; Comments of Olin Corporation; Comments
of the Western Coal Traffic League (including the statement of economists Frederick Warren-Boulton and
Kenneth Baseman); Comments of Westlake Chemicals.

>? US Magnesium v. U.P.R.R., S.T.B. Docket No. 42114, Jan. 27, 2010.

33 West Texas Utilities v. BN Railroad, | $.T.B. 638 [1996]; Kansas City Power & Light v. Union Pacific
Railroad, STB Docket No. 42095 [2008].

15


shortcomings before it could be confident that an R/VC ceiling would achieve its

intended goal.

CONCLUSION

USDA believes that the record in this proceeding provides persuasive evidence
that captive shippers are not adequately protected from the lack of a competitive
marketplace by the current regulatory regime, and that further moves in the direction of
increasing competition and limiting the rates charged to some captive shippers that do not
jeopardize the financial health of the rail industry would be appropriate. The details of
any new procedures for rate reasonableness proceedings or any changes to competitive
access rules are obviously critically important to the effectiveness of such regulatory
reforms. Therefore, these new policies should be the subject of future rule-making
proceedings before the Board.

USDA appreciates this opportunity to offer its views to the Board, and looks

forward to continuing participation as the Board addresses these important issues.

Respectfully submitted,

Zea

Edward Avalos

Under Secretary

Marketing and Regulatory Programs
U.S. Department of Agriculture


railroad regulatory policy. The U.S. railroad industry has changed significantly since the
Board’s competitive access standards were adopted in the mid-1980s. These changes
make it appropriate for the Board to consider means of increasing competitive access in

the U.S. railroad industry.

THE BOARD HAS LEGAL AUTHORITY TO MAKE CHANGES

USDA submits that Congress and the Courts have given the Board broad
authority to take steps to facilitate more competition in the railroad industry. Congress
has expressed the basic goals of national rail transportation policy, including ensuring a
sound rail transportation system, effective competition among rail carriers, and
reasonable rail rates, in very general terms, entrusting the Board to balance these
conflicting goals. The courts also have ruled that the Board has wide discretion in its
decisions. ' Moreover, the specific statutory language pertinent to the regulatory options
discussed herein is generally permissive and allows for significant discretion.” In these
circumstances, the Board may depart from prior precedents and change its existing

regulations, provided that it explains the reasons for a change in policy.’

' 49 U.S.C. § 10101; Midtec Paper Corp. v. United States, 857 F.2d 1487, 1497 (D.C. Cir. 1988)
(“Congress wisely entrusted the administration of national rail transportation policy to the [Board]”);
Baltimore Gas & Elec. Co. v. United States, 817 F.2d 108, 115 (D.C. Cir. 1987) (explaining that the Board
need only arrive “at a reasonable accommodation of the conflicting policies set out in its governing
statute”).

? See 49 U.S.C. §§ 10701(d), 10704(a), 10705, 10707, 11102.
3 See generally FCC v. Fox Television Stations, Inc., 129 S.Ct. 1800, 1811 (2009) (“it suffices that the new

policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to
be better” (emphasis in original)).


AUTHORITY AND INTEREST
The Secretary of Agriculture is charged with the responsibility under the

Agricultural Adjustment Act of 1938 and the Agricultural Marketing Act of 1946 to

represent the interests of agricultural producers and shippers in improving transportation
services and facilities by, among other things, initiating and participating in Surface
Transportation Board (Board) proceedings involving rates, charges, tariffs, practices, and

services.

INTRODUCTION

The Surface Transportation Board (Board) initiated this proceeding to obtain
views on whether it should take steps to facilitate more competition in the railroad
industry. In its Notice, the Board requested that parties address the merits of possible
regulatory changes, including changes to rules regarding reciprocal switching, terminal
trackage rights, and bottleneck pricing, as well as its legal authority to make such
changes.

In the comments below, the U.S. Department of Agriculture (USDA) urges the
Board to use mandatory reciprocal switching and trackage rights agreements as one
means to increase rail-to-rail competition. USDA also urges the Board to review its past
“bottleneck” decisions and seek measured ways to support increased competition among
railroads through incremental changes. Finally, USDA suggests that the Board consider
alternatives for determining rate reasonableness.

After reviewing the comments submitted during this proceeding, USDA has

concluded that there is ample legal and factual basis for the Board to consider changes in


As rail revenues become persistently adequate, the tradeoff between the short-run
interests of shippers (in lower rates) and the long-run interests of shippers (in rail
revenues that are high enough to ensure adequate investment) begins to shift in favor of
lower rates. In particular, though the high rates paid by captive shippers may be
considered “reasonable” so long as a railroad is earning less overall than the cost of
maintaining and improving the railroad network, as discussed below even current policy
recognizes that the same rates may be judged “unreasonable” when the railroad is earning
more overall than this cost.

There is general agreement that, in order for the railroads to efficiently recover
high fixed costs, it is necessary and appropriate that shippers without competitive options
pay a higher share of these fixed costs than other shippers.” However, it is neither
appropriate nor the law that the degree to which these captive shippers are discriminated
against be unlimited.”> Under Constrained Market Pricing precedent, a captive shipper is
not to be “required to continue to pay differentially higher rates than other shippers when
some or all of that differential is no longer necessary to ensure a financially sound carrier
capable of meeting its current and future service needs.”TM This principle is called the
“revenue adequacy constraint” on differential pricing to captive shippers, yet no shipper
has chosen to use this avenue in a rail rate case, and there is great uncertainty about its

application.2>

2 This approach is known as Ramsey pricing or 3rd degree price discrimination. Coal Rate Guidelines,
Nationwide, | 1.C.C. 2d 520 (1985).

3 Coal Rate Guidelines, Nationwide, | 1.C.C. 2d 520 (1985).
ae Major Issues in Rail Rate Cases, STB Ex Parte No. 657 (Sub-No. 1), October 30, 2006, at 7.

25 The revenue adequacy constraint has been applied, however, in a pipeline case decided by the Board in
2000. STB Dkt. No. 41685, CF Industries, Inc. v. Koch Pipeline Co. LP (served May 9, 2000).

13


Moreover, an R/VC ceiling has at least one advantage over the types of
competitive access options discussed above: a relatively high level of certainty about its
effects. It is relatively easy to estimate what the effect of such a ceiling would be on the
revenues of the railroad industry, and the level of the ceiling can be calibrated to achieve
whatever balance between rate relief and revenue adequacy is considered desirable from
arail competition policy standpoint. By contrast, new regulatory policies with uncertain
effects tend to discourage investment, both by investors in railroads and by railroads in
capital projects. An R/VC ceiling has the additional benefit of focusing a remedy on the
most egregious cases of high rates caused by lack of competition, and does not depend on
the competitive response of a second carrier (which, as already noted, some parties have
alleged to be less than might be expected).

However, the effectiveness of an R/VC ceiling in eliminating the most
uncompetitive rates rests on the reliability of the URCS as an indicator of where
competition is most absent. The Christensen Report has raised serious questions about
the reliability of URCS for this purpose, and others have urged the Board in prior
proceedings to update URCS.** USDA is pleased that the Board has begun to refine this

critical regulatory tool, for the Board would clearly need to remedy URCS’s

34 Western Fuels Association and Basin Electric Power Cooperative v. BNSF Railway, STB Docket No.
42088 [2009].

35 US Magnesium v. U.P.R.R, S.T.B. Docket No. 42114, Jan. 27, 2010. Remedying URCS’s shortcomings
is important regardless of the outcome of this proceeding, and we are pleased that the Board has begun to
refine this critical regulatory tool.

36 See DOT Comments in Ex Parte No. 680, Study of Competition in the Freight Railroad Industry, and
Christensen Report, Vol. 2 at 11-25, respectively.

16